Bankruptcy

Where it is a person who cannot pay their debts, the person's creditors may ask the court to appoint a trustee in bankruptcy. This is a professional accountant who is appointed by the court, and they will take control of the bankrupt person's assets. Some assets are protected by law, but the trustee in bankruptcy will sell off all of the other assets and use the proceeds to pay as much of that person's debts as possible. After the process is complete the person is discharged from bankruptcy, and the person is free from any further liability to pay those claims, but normally that person will be limited in their ability to borrow money again because their credit rating will be damaged.

Where it is an organisation who cannot pay their debts, the creditors may ask the court to appoint a liquidator. The liquidator does a very similar job to the trustee in bankruptcy except that there are no assets which are protected so the liquidator can sell everything. Once all of the assets of the organisation have been sold, the organisation is then dissolved and no longer exists. Organisations do not get discharged from bankruptcy in the same way that a living person does.

Insolvency or bankrupcy

People often confuse the terms bankruptcy and insolvency, and sometimes they use one word when they really mean the other. Insolvency usually just means that a someone does not have enough money to pay their debts or (sometimes) that the total amount of their debts is worth more than the total amount of their assets. Bankruptcy is a formal legal process in front of the courts. Although the two terms are connected, just because a person is insolvent does not necessarily mean that they will go into bankruptcy.